A process meant to manage a family's or individual's income and expenses, and ensure funds are available for savings and investment. If expenses exceed income on a regular basis, achieving one's financial goals, such as retirement at a certain age or paying to send children to college, will be difficult to achieve.
Leimberg, Satinsky, Doyle, Jackson, Tools & Techniques of Financial Planning, 7th Edition, Chapter 15
Hallman & Rosenbloom, Personal Financial Planning, 7th Edition, Chapter 2
Budgeting involves estimating income and expenses for a given period of time to allow for development of a financial plan that will allow one to attain financial objectives. A budget allows one to control household expenses and measure progress toward achievement of specific goals, such as retirement, funding a college education or buying a vacation home. A budget is used as a means of financial self-evaluation.
Few individuals enjoy the budgeting performance, and many dislike the required record keeping.
Steps in the budget process:
- Estimate annual income
- Estimate expenditures - Break down expenses between fixed (or nondiscretionary) and discretionary.
- Determine the income surplus or shortfall
- Consider methods to increase income or decrease expenses
- Calculate both income and expenses as a percentage of the total - Consider if there is a better allocation of resources.
II. Emergency fund planning
An emergency fund that can be tapped to meet unexpected expenses is recommended for most families and individuals. Emergencies that may occur and require use of emergency funds include medical expenses, disability, property losses and unemployment.
The recommended size of an emergency fund is usually expressed in terms of monthly income, such as three to six months. Emergency funds should be invested conservatively, such as in a bank or money market account, and easily liquidated when needed.
III. Debt Management Ratios
Personal FinanceMake a commitment to prevent finances from souring your relationship.
Personal FinanceA personal budget is a useful tool for tracking your income and expenses.
Personal FinanceEmergency funds are considered mandatory by most financial-planning experts, but they can be expensive to hold and ultimately unnecessary.
Personal FinanceWhether your issue is credit card debt, student loans (or the fact that Social Security isn't rising next year), it's time to learn how to build a budget.
InsuranceLearn five broad personal finance rules that can help get you on track to achieving specific financial goals.
RetirementLearn how the "sandwich generation" can save for retirement while taking care of their kids and parents.
Personal FinanceDo you know how you’d pay the bills if you lost your job, had a health crisis or needed a major car repair? That's why an emergency fund is essential.
Personal FinanceDo you have enough savings to cover the costs of unforeseen crises? We show you how to plan ahead.